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Category: Business Law
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Experience:  20 years experience in business law - sole proprietor, partnership, and corporations
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Hello. I run a penny stock newsletter and have a question regarding

Customer Question

Hello. I run a penny stock newsletter and have a question regarding the legality of selling stock during promotional coverage of the same stock. I'm not looking for answers regarding laws/rules for stock given as compensation. In this situation I am only referring to stock purchased on the open market.

To me it seems more ethical for the newsletter operator, who has a vested interest in his readers well-being and success, to be the one selling the stock than for it to be a third party who does not have an interest in the well-being of the newsletter readers. But I have always been told it is illegal for the newsletter owner to be the one who owns and sells the stock the newsletter is promoting. So everyone in the newsletter industry gets paid cash by third parties to promote stock, and disclaims all of this info in their promotional email.

I have researched case law thoroughly and it seems that it IS legal for a newsletter to own and sell the stock they are promoting, as long as some very specific things are disclaimed in clear and concrete language, and in plain view of the reader.

As I understand it, the newsletter must disclaim the exact number of shares they own, where and how they obtained the stock, and most importantly, that the newsletter intends to sell their entire position during the course of the stock's promotion.

Also I'm not sure, but possibly the average price per share the newsletter paid for the stock. (Please let me know if the average price per share is required information or not, if you can. Thanks!)

In cases such as The Miami SEC office against Dan Ryan/Penny Stock Chaser, and the lawsuit regarding a penny stock RCYT (Recycle Tech) and the promoters Pudong LLC and OTC Solutions who promoted RCYT while they were selling RCYT, although they got the stock as payment instead of buying it on the open market.

Here is a link to the case against Pudong, OTC Solutions and others regarding RCYT:

http://www.sec.gov/litigation/complaints/2012/comp-pr2012-82-2.pdf

The following statements in the complaint imply that the illegal aspect of what the promoters were doing was not actually the owning and selling of the stock. They imply the illegal activity was their complete lack of a clear statement expressing to their readers that their intent is absolutely to sell all of their stock while they are promoting it.

Complaint G on page 14 says: "OTC Solutions and Pudong Tout Recycle Tech Stock Without Properly Disclosing Their Stock Compensation Or Intent To Sell"

Page 14 goes on to say: "None of the newsletters disclosed the newsletter owner’s intent to sell shares, or named the source of the stock the newsletter had received."

Finally, section 69 on page 14 says: "OTC Solutions, engaged in the fraudulent practice of “scalping,” specifically, selling the same stock his own reports on Recycle Tech were recommending that investors buy without disclosing the sales. "

Here is a link to the Dan Ryan/Penny Stock Chaser complaint:

http://www.sec.gov/litigation/complaints/2010/comp21580.pdf

On top of page 5, section C, 1 the allegation summary s: "The Defendants' Failure To Adequately Disclose Their Sale Of Stocks They Tout"

Since the SEC alleges they did NOT "adequately disclose" their sale of stocks they tout, it implies that there is a standard of "adequate disclosure" which the defendants did not meet.

That would mean to sell a stock while I am promoting it, I must meet all of the rules and requirements to have fully adequate disclosure.

Overall the problem seems to be these newsletters try to get away with a vague disclaimer regarding their intent to sell. The accused newsletters use vague "we have the right to sell our stock, we may sell it at any time" kind of language that is not explicit enough to truly describe their actual intent of selling ALL of their stock, and doing it all during their promotion.

In addition to my full and complete usual legal disclaimer I use whenever I promote a stock when I am being paid by a third party, I will place an additional disclaimer at the very top of the page.

The disclaimer at the top of the page will be in large font bold type, and here is a sample:

"We are long ABCD stock. We have purchased 5 million shares in the open market, at an average price of $.012. We intend to sell our entire position during our promotional coverage of the stock, which may include at or near the time you receive this message. This is likely to hurt share prices and is a major conflict of interest. Consider this thoroughly before making trading decisions. We reserve the right to hold some or all of our position in ABCD during and after our promotional coverage if we choose to do so. We reserve the right to add to our ABCD position at any time without notice."

Please help me verify if I'm correct. I would like to move forward on doing this but can't risk breaking criminal or civil laws for any reason. Thank you.
Submitted: 1 year ago.
Category: Business Law
Expert:  BizIPEsq. replied 1 year ago.

TheLegalistEsq :

Hello, I will be assisting you.

TheLegalistEsq :

Let me do research

Customer :

Okay, no problem.

TheLegalistEsq :

The SEC does not have a statutory definition of what constitutes "adequately disclose". So let's look at the cases you cited and collect the various elements that if present would have been sufficient to constitute adequate disclosure:

TheLegalistEsq :

Need to:

TheLegalistEsq :

Disclose the fact that the promoter (publisher) is compensated and what is the Compensation itself (if possibly list prices and numbers)

TheLegalistEsq :

Disclose the promoter's intention to Sell and generate a profit off the stock that is being reviewed

TheLegalistEsq :

Avoid puffery (e.g explosive opportunity). If you have to describe a good opportunity borrow from the language of traditional financial media (e.g. comparative research indicates that this stock represents a good opportunity)

TheLegalistEsq :

Disclose if your actions were different than your recommendations

TheLegalistEsq :

Consider disclosing the third party identity that hired you to promote the stock (this is a tricky one because most third parties don't want to be disclosed). At the very least disclose that there is a third party.

TheLegalistEsq :

It's important to note that the SEC has consistently held that the practice of scalping where a promoter sells their own shares directly into their paid promotion or buy alert is illegal though to date all cases involved a general disclaimer

TheLegalistEsq :

With each case that settles and with each complaint the picture becomes a little bit clearer and I commend you on taking a very unique and transparent approach. From a legal perspective it will be interesting to see if you get any attention from the SEC. Of course I hope that the open approach will positively impress the regulators

TheLegalistEsq :

good luck!

Customer :

That advice was pretty bad. I already run a large newsletter group and if I didn't know what I was doing and actually just took your advice I'd probably go to jail or at least get sued and banned from the industry by the SEC. You made it sound like all these things like disclosing the 3rd party are optional, but it's illegal to not disclose the third party and it actually says so in one of the links I sent.

TheLegalistEsq :

You've asked me to verify that you are correct. Under the terms of this site unfortunately I cannot render legal advice and cannot verify whether your actions are correct or not. I only permitted to provide you with general guidelines as to the actions that need to be taken. You have provided a fairly comprehensive review of the the cases to date. One of your questions concerned whether you ought to disclose the share price and quantity. As noted, I cannot advise you specifically rather I have to use general language. So generally speaking to the extent possible the purchase price and quantity of shares ought to be disclosed.

TheLegalistEsq :

If you have any additional specific questions I will answer them to the extent permitted by this site and I trust you will change your rating.

TheLegalistEsq :

I do highly recommend that you consult with a securities attorney who would be able to render specific legal advice. I have several colleauges that I can recommend though they charge upward of $700 an hour.

Customer :

ok

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